Inside The Market

The Market Influence We Ignore

Still caught in the winter of 2019, but, with spring on our minds, there is a good chance you have already heard bearish price forecasts for grains in 2019. Having spoken at several farm gatherings myself, I am also guilty of pointing out that U.S. ending stocks estimates for corn and soybeans look higher again this fall. Based on DTN’s early assessment, a seventh consecutive year of good crop weather appears likely.

SOYBEAN PRESSURE

Among the big three crops, the soybean estimate is causing the most concern these days as we face the possibility of a billion bushels or more of U.S. ending stocks in both 2018-19 and the new-crop season. To put that in perspective, the U.S. didn’t even produce a billion bushels of soybeans until 1968, and, the highest ending surplus before this season was 574 million bushels in 2006-07.

USDA’s current estimate of 955 million bushels of U.S. ending soybean stocks in 2018-19 represents 23% of annual use and statistically correlates to a $6 cash price--a level not seen since 2006. As painful as that may be for producers to hear, there are other factors to consider before giving up on the new season.

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First of all, it is still early in 2019, and, winter fundamental outlooks, like preseason sports polls, simply don’t have enough information to be reliably accurate. The uncertainty level at this time of year is high.

Second, low prices themselves have a bullish influence on future markets that often goes unrecognized. I have never liked the saying, “Low prices cure low prices,” because it seems like a callous way of ignoring economic hardship--a little like saying cancer cures smoking.

TREND TELLS THE STORY

Looked at objectively, however, more than 50 years of price data shows spot corn and soybean prices that start the year in the lower thirds of their five-year ranges tend to trade higher in the year that follows. This not only goes directly against the grain of all the bearish fundamental outlooks that low prices tend to attract in wintertime, it also cautions us against taking current price trends too seriously.

Given the uncertainty of trade with China, producers are correct to be concerned about the downside risk of soybean prices in 2019. As I have mentioned before, the purchase of inexpensive soybean put options is one effective strategy to consider.

Probabilities aren’t the same as guarantees, and, low probability events do happen, but, we should not ignore over 50 years of price data, which suggests the odds favor higher soybean prices in 2019. Until more is known, we need to stay skeptical of winter price outlooks.

Read Todd’s blog at about.dtnpf.com/markets.

You may email Todd at todd.hultman@dtn.com, or call 402-255-8489.

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